NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2012
Note A - Summary of Significant Accounting Policies
A summary of the Companys significant accounting policies consistently applied in the preparation of the accompanying financial
statements follows:
1. Nature of Business
The Company was organized in December 1985 and is engaged in the business of operating a gamma irradiation facility using Cobalt 60 for the sterilization of medical, surgical, pharmaceutical and packaging
materials. It also disinfects fruits, vegetables, oysters and meat products to enhance safety or eliminate insect pests.
2. Use of Estimates
Management uses estimates and assumptions in preparing financial statements in accordance with generally accepted accounting principles. These estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could vary from the estimates that were assumed in preparing the financial statements.
3. Revenue Recognition
The primary source of revenue is from treating products with gamma radiation from Cobalt 60. Net Revenue is the gross income from such processing less allowances, if any. Revenues are recorded after the
Companys performance obligation is completed and product has been processed in accordance with the customers specifications and collection of the resulting receivable is probable.
4. Accounts Receivable and Allowances for Doubtful Accounts
Accounts receivable are customer obligations arising from the sale of services and are due under normal trade terms requiring payment within 30 days from
the invoice date. Accounts over ninety days are monitored closely by Management and delinquencies are determined based on payment history, aging analysis and any specific known troubled assets. Receivables are charged off to the allowance for
doubtful accounts once Management determines that they are uncollectible.
5. Property, Plant and Equipment
Property, plant and equipment are stated at cost. Before 2012, depreciation for assets other than cobalt has been computed on the straight-line method for both financial reporting and income tax purposes.
Beginning in 2012, depreciation for assets other than cobalt has been computed on the straight-line method for financial reporting purposes and on the accelerated methods for income tax purposes for any new assets.
The useful lives of property, plant and equipment for purposes of computing depreciation are:
|
|
|
Building
|
|
31.5-40 Years
|
Furniture and Equipment
|
|
5-15 Years
|
The total cost basis of Cobalt has been depreciated using engineering estimates from published tables under which one-half of the
remaining value is written off over 5.26 year periods.
Estimated useful lives are periodically reviewed and if warranted, changes will be
made accordingly.
Nordion is the Companys supplier of Cobalt 60. When Cobalt is purchased, Nordion agrees to accept the return of all
Cobalt 60 that has reached the end of its useful life for a fee. The Companys facility has the capacity to store the Cobalt 60 and there is no regulatory or industry requirement stating when the Cobalt needs to be returned. Management
periodically reviews the value of the Cobalt 60 and has determined an environmental remediation liability is not necessary since the value of the Cobalt 60 exceeds the disposal costs.
F-8
FOOD TECHNOLOGY SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2012
6. Cash and Cash Equivalents
All highly liquid investments with original maturities of three months or less are considered to be cash and cash equivalents.
7. Concentration of Credit Risk
The Company maintains its cash in three financial institutions. The Federal Deposit Insurance Corporation insures up to $250,000 per legal entity per financial institution and all funds in
noninterest-bearing transaction accounts until December 31, 2012. The Companys uninsured balances totaled approximately $144,736 and $0 as of December 31, 2012 and 2011.
8. Earnings Per Share
Basic earnings per share are computed using the weighted average number of common shares outstanding. Diluted earnings per share are computed by the weighted average number of common shares outstanding,
plus the effect of common stock equivalents that are dilutive.
9. Fair Value of Financial Instruments
The carrying value of cash, accounts receivable, prepaid expenses, deposits, accounts payable and accrued liabilities approximate fair value.
10. Stock Option Plans
The Company has various stock option plans for employees and other individuals providing services to or serving as Directors of the Company. (See Note G -
Stock Options) Compensation cost under the plans is recognized using the fair value recognition provisions of FASB ASC 718. Such cost is recognized for shares expected to vest on a straight-line basis over the requisite service period of the award
using the Black-Scholes option-pricing model. FASB ASC 718 requires the benefits of tax deductions in excess of the compensation cost recognized for those options to be classified as financing cash inflows rather than operating cash inflows. This
amount is shown as excess tax benefit from exercises of stock options on the statements of cash flows. The excess tax benefits from the expired options are recorded in additional paid-in capital and any tax benefits from stock options expired
unexercised are offset to the extent of any remaining balance.
11. Advertising
The Company expenses all advertising costs when incurred. Advertising expense recognized for the years ended December 31, 2012 and 2011 was $10,513 and $4,713, respectively.
12. Reclassification
Certain reclassifications have been made to the prior years financial statements to conform to the current years presentation.
Note B - Certificate of Deposit
Certificate of deposit totaling $150,169 bears interest of .15% that compounds quarterly and matures on June 23, 2013 with
penalties for early withdrawal. Any penalties for early withdrawal would not have a material effect on the financial statements.
F-9
FOOD TECHNOLOGY SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2012
Note C - Loan Fees
During the first quarter of 2012, renewal fees in the amount of $12,269 were incurred in connection with the Regions letter of credit
(See Note D - Letter and Line of Credit). These fees were amortized based on the life of the loans and written off upon completion. Amortization expense for the years ended December 31, 2012 and 2011 was $15,123 and $20,127, respectively.
Note D - Letter and Line of Credit
The State of Florida requires as a condition of the Companys Radioactive Materials License a $600,000 irrevocable standby letter
of credit. This letter of credit with Regions bank was renewed at similar terms prior to its February 24, 2013 expiration to satisfy the states requirements. The letter of credit has an annual fee of $12,269 and is collateralized by the
Companys real estate and a $150,169 certificate of deposit.
The Company has a separate $400,000 line of credit with Regions Bank that
is available for the short term capital needs of the Company. The line of credit is secured by the Companys real estate and incurs interest at prime plus 1.35%. As of December 31, 2012, the Company has not used the line of credit.
Note E - Income Taxes and Available Tax Loss Carryforwards
The components of income tax / (benefit) are as follows:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Current
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
|
|
$
|
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred-Benefit
|
|
|
|
|
|
|
|
|
Federal
|
|
|
416,200
|
|
|
|
444,100
|
|
State
|
|
|
71,200
|
|
|
|
76,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
487,400
|
|
|
|
520,100
|
|
|
|
|
|
|
|
|
|
|
Total Income Tax Expense /(Benefit)
|
|
$
|
487,400
|
|
|
$
|
520,100
|
|
|
|
|
|
|
|
|
|
|
Income taxes differ from the amounts computed by applying the effective income tax rates of 37.63% to income before income taxes as a
result of the following:
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Expected Provision At US Statutory Rate
|
|
$
|
438,700
|
|
|
$
|
486,100
|
|
State Income Tax Net Of Federal Benefit
|
|
|
46,900
|
|
|
|
51,900
|
|
Nondeductible Expenses
|
|
|
1,800
|
|
|
|
6,500
|
|
Change In Estimates And Available NOL Carryforwards
|
|
|
|
|
|
|
1,100
|
|
Change In Valuation Allowance
|
|
|
|
|
|
|
(25,500
|
)
|
|
|
|
|
|
|
|
|
|
Income Tax Expense / (Benefit)
|
|
$
|
487,400
|
|
|
$
|
520,100
|
|
|
|
|
|
|
|
|
|
|
The Company had income tax net operating loss (NOL) carryforwards for federal income tax purposes. The NOL will expire in
various years ending through the year 2030.
F-10
FOOD TECHNOLOGY SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2012
The Companys NOL carryforward is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
December 31,
2012
|
|
|
As of
December 31,
2011
|
|
|
|
Federal
|
|
|
State
|
|
|
Federal
|
|
|
State
|
|
NOL Carryforward - Beginning Of Year
|
|
|
2,071,925
|
|
|
|
2,071,925
|
|
|
|
3,672,530
|
|
|
|
3,672,530
|
|
Less Used
|
|
|
(466,060
|
)
|
|
|
(963,254
|
)
|
|
|
(1,600,605
|
)
|
|
|
(1,600,605
|
)
|
Less Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOL Carryfoward - End Of Year
|
|
|
1,605,865
|
|
|
|
1,108,671
|
|
|
|
2,071,925
|
|
|
|
2,071,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of the Companys deferred tax assets and (liabilities) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
December 31,
2012
|
|
|
As of
December 31,
2011
|
|
|
|
Current
|
|
|
Noncurrent
|
|
|
Current
|
|
|
Noncurrent
|
|
NOL Carryforward
|
|
$
|
521,000
|
|
|
|
56,000
|
|
|
$
|
651,000
|
|
|
|
128,700
|
|
Accrued Liabilities
|
|
|
|
|
|
|
19,500
|
|
|
|
|
|
|
|
17,700
|
|
Share-Based Compensation
|
|
|
|
|
|
|
38,500
|
|
|
|
|
|
|
|
39,000
|
|
Property, Plant & Equipment
|
|
|
|
|
|
|
(239,400
|
)
|
|
|
|
|
|
|
|
|
Less: Valuation Allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Deferred Taxes
|
|
$
|
521,000
|
|
|
$
|
(125,400
|
)
|
|
$
|
651,000
|
|
|
$
|
185,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The change in the valuation allowance is as follows:
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
Change
|
|
December 31, 2010
|
|
|
(25,500
|
)
|
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
25,500
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
Deferred income taxes reflect the net tax effects of the temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes.
During 2011, as a result of the continuing diversification and
growth in customer base, ongoing profits from operations and the Companys revised estimate of future taxable income, it was concluded that it is more likely than not that future taxable income will be sufficient to realize all of the
Companys deferred asset. As of December 31, 2012, no further changes to the valuation allowance have been made.
The Company
believes that its estimate of future operations is conservative and reasonable, but inherently uncertain. If the Company realizes unforeseen material losses in the future and its future projections of income decrease, the allowance could be
increased resulting in a charge to income.
The Companys tax years 2009 through 2011 remain open to examination by taxing jurisdictions.
Note F - Accrued Liabilities
Effective January 1, 2011, the Board of Directors modified the Presidents employment contract to include a resignation
clause. This clause provides two weeks base pay for every full year worked for the company, if a six month notice is received before the President leaves. As of December 31, 2012 and 2011 in relation to the resignation clause and accrual of
$51,700 and $47,000 has been recorded.
As of December 31, 2012 an accrual of the Companys use tax liability has made in the amount
of $166,524, including $11,729 of accrued interest.
F-11
FOOD TECHNOLOGY SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2012
Note G - Stock Options
On February 9, 1999, the Board of Directors approved an option program for non-employee Directors.
The program was amended in 2001 and 2005 to provide for the annual granting to each non-employee Director of five year options to purchase 1,500 shares
of common stock, exercisable at the end of one year at the market value of the shares of common stock on the date of grant. Also, the Chairman of the Board is awarded annually five year options to purchase an additional 2,500 shares. Options
outstanding under this plan as of December 31, 2012 and 2011 are 8,500 and 21,500, respectively.
No further options are being issued
under the 1999 Plan.
On September 23, 2000, the Stockholders approved the 2000 Incentive and Non-Statutory Stock Option Plan (the
2000 Plan).
The 2000 Plan was administered by the Board of Directors who was authorized to grant incentive stock options
(ISOs) to Officers and employees of the Company and non-qualified options (NQOs) for certain other individuals providing services to or serving as Directors of the Company.
The maximum number of shares of the Companys Stock that may be issued under the 2000 Plan is 125,000 shares. Options outstanding under this plan as
of December 31, 2012 and 2011 are none and 20,000, respectively.
The ISOs are exercisable 20% of the authorized amount immediately
and 20% in each of the following four years. ISOs granted to an optionee terminate 30 to 90 days after termination of employment or other relationship, except that ISOs terminate the earlier of the expiration date of the option, or 90 to
180 days in the event of death and 180 days to one year in the event of disability.
No further options are being issued under the 2000 Plan.
In 2003 and 2008 the company reached the maximum number of stock options allowed to be issued under the 2000 stock option plan. The company
therefore issued 65,000 stock options outside of the aforementioned plans. Options outstanding outside a specific plan as of December 31, 2012 and 2011 are 60,000 and 65,000, respectively.
On May 14, 2009, the Stockholders approved the 2009 Incentive and Non-Statutory Stock Option Plan (the 2009 Plan).
The 2009 Plan is administered by the Board of Directors who is authorized to grant incentive stock options (ISOs) to Officers and
employees of the Company and non-qualified options (NQOs) for certain other individuals providing services to or serving as Directors of the Company
The maximum number of shares of the Companys Stock that may be issued under the 2009 Plan is 125,000 shares. Options granted and outstanding under this plan are as follows:
|
|
|
|
|
|
|
|
|
Year
|
|
Granted
|
|
|
Outstanding
|
|
Before 2011
|
|
|
23,000
|
|
|
|
17,000
|
|
2011
|
|
|
10,000
|
|
|
|
10,000
|
|
2012
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,000
|
|
|
|
37,000
|
|
|
|
|
|
|
|
|
|
|
The aggregate fair market value (determined at the time an ISO is granted) of the Common Stock with respect to which ISOs are
exercisable for the first time by any person during any calendar year under the Plans shall not exceed $100,000.
F-12
FOOD TECHNOLOGY SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2012
The ISOs are exercisable 20% of the authorized amount immediately and 20% in each of the following
four years. ISOs granted to an optionee terminate 30 to 90 days after termination of employment or other relationship, except that ISOs terminate the earlier of the expiration date of the option, or 90 to 180 days in the event of death
and 180 days to one year in the event of disability.
A summary of the status of the Companys stock options is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Wtd. Avg.
Exercise
Price
|
|
|
Wtd. Avg.
Remaining
Contractual
Life (Yrs)
|
|
Outstanding At December 31, 2010
|
|
|
242,000
|
|
|
$
|
2.43
|
|
|
|
3.01
|
|
Granted
|
|
|
10,000
|
|
|
$
|
4.85
|
|
|
|
|
|
Exercised
|
|
|
(101,500
|
)
|
|
$
|
3.24
|
|
|
|
|
|
Expired/Forfeited
|
|
|
(11,000
|
)
|
|
$
|
3.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding At December 31, 2011
|
|
|
139,500
|
|
|
$
|
1.95
|
|
|
|
4.02
|
|
Granted
|
|
|
10,000
|
|
|
$
|
6.26
|
|
|
|
|
|
Exercised
|
|
|
(41,000
|
)
|
|
$
|
2.57
|
|
|
|
|
|
Expired/Forfeited
|
|
|
(3,000
|
)
|
|
$
|
2.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding At December 31, 2012
|
|
|
105,500
|
|
|
$
|
2.10
|
|
|
|
4.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested/Exercisable At December 31, 2012
|
|
|
93,500
|
|
|
$
|
2.25
|
|
|
|
4.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of the status of the Companys nonvested stock options is as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Wtd. Avg.
Grant Date
Fair Value
|
|
Nonvested, At December 31, 2010
|
|
|
64,500
|
|
|
$
|
0.58
|
|
Granted
|
|
|
10,000
|
|
|
$
|
3.25
|
|
Vested
|
|
|
(46,500
|
)
|
|
$
|
1.27
|
|
|
|
|
|
|
|
|
|
|
Nonvested, At December 31, 2011
|
|
|
28,000
|
|
|
$
|
0.41
|
|
Granted
|
|
|
10,000
|
|
|
$
|
4.36
|
|
Vested
|
|
|
(26,000
|
)
|
|
$
|
1.99
|
|
|
|
|
|
|
|
|
|
|
Nonvested, At December 31, 2012
|
|
|
12,000
|
|
|
$
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired/Forfeited During Year
|
|
|
3,000
|
|
|
$
|
1.16
|
|
|
|
|
|
|
|
|
|
|
The Company estimated the fair value at the date of grant using the Black Scholes option valuation model with the following
assumptions:
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2012
|
|
2011
|
Risk Free Interest Rate
|
|
0.62% - 1.04%
|
|
0.83% - 2.24%
|
Expected Volatility
|
|
77.98% - 80.25%
|
|
80.03% - 84.66%
|
Expected Life
|
|
5 years
|
|
5 years
|
Dividend Yield
|
|
0%
|
|
0%
|
Option valuation models require the input of highly subjective assumptions including the expected option life. Because the
Companys employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective assumptions can materially affect the fair value estimate, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock options.
F-13
FOOD TECHNOLOGY SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2012
For the years ended December 31, 2012 and 2011, 41,000 and 101,500 of companys stock options
were exercised under a cashless program resulting in the issuance of 25,125 and 48,714 shares and an excess tax benefit of $47,900 and $0, respectively.
For the years ended December 31, 2012 and 2011 there were 3,000 and 11,000 expired stock options. The expired stock options created a $1,300 and $0 tax benefit that has been charged against paid-in
capital from excess tax benefits.
The Company recognized $70,174 and $48,646 share-based compensation expense for the year ended
December 31, 2012 and 2011, respectively. On November 30, 2012, the Company issued 5,154 shares of Company stock in lieu of cash as a bonus to an employee with a fair market value of $26,285. This amount is included in the amount presented
above as share-based compensation.
As of December 31, 2012, there was $19,804 of unrecognized share-based compensation costs related to
non-vested stock options, which will be amortized to expense over future periods. The Company expects to recognize that cost over the weighted average vesting period 0.91 years.
Note H - Related Party Transactions
The Companys supplier of Cobalt, Nordion (Canada) Inc., formerly MDS Nordion, owned approximately 16.8% of the Companys
outstanding common stock. By agreement entered into February 10, 2011, Nordion (Canada) Inc., formerly MDS Nordion, sold 463,317 shares of common stock to Fort Ashford Holdings, LLC for $3.60 per share. As of February 25, 2011, the closing
date for the sale, Nordion (Canada) ceased to be a shareholder and no longer has any direct or indirect interest in the outstanding shares of common stock of the Company.
The Company has purchased the following Cobalt from Nordion as a related party:
|
|
|
|
|
|
|
|
|
Year
|
|
Curies
|
|
|
Amount
|
|
2010
|
|
|
105,757
|
|
|
$
|
81,740
|
|
2011
|
|
|
200,000
|
|
|
$
|
512,978
|
|
Note I - Earnings Per Share
Earnings per share are calculated in accordance with ASC 260-10, Earnings Per Share. Basic earnings per share are computed
by dividing net income by the weighted average number of common shares outstanding during the years. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common shares were exercised or
converted into common shares. Common share equivalents are excluded from the computation of diluted earnings per share if their effects would be anti-dilutive.
ASC 260-10 requires the presentation of both Basic EPS and Diluted EPS on the face of the Companys Statements of Operations.
The following table sets forth the computation of basic and diluted per share information:
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For the Years Ended December 31,
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2012
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2011
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Numerator:
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Net Income
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$
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925,943
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$
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909,502
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Denominator:
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Wtd. Avg. Common Shares Outstanding
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2,823,925
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|
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2,776,660
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Dilutive Effect Of Stock Options
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|
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95,500
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|
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139,500
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Wtd. Avg. Common Shares Outstanding, Assuming Dilution
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|
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2,919,425
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|
|
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2,916,160
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F-14
FOOD TECHNOLOGY SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2012
Out of the money options excluded from the computation of diluted EPS:
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For the Years Ended December 31,
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2012
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2011
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Stock option with exercise price of $6.26
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|
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10,000
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Note J - Concentration and Credit Risk
Although the Company continues to diversify its customer base it does a significant amount of its total business with the following
customers.
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For the Years Ended December 31,
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2012
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2011
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Customer 1
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30
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%
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36
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%
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Customer 2
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|
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29
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24
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Total
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59
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%
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60
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%
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The Companys cash and accounts receivable are subject to potential credit risk. Management continuously monitors the credit
standing of the financial institutions and customers with which the Company deals. A provision has been made for doubtful accounts which historically have not been significant.
The Companys supplier of Cobalt 60 is Nordion (Canada) Inc. In the event it is unavailable from Nordion the Company can obtain Cobalt 60 from one other source.
Note K - Subsequent Events
We have evaluated subsequent events for recognition or disclosure in these financial statements through the date of issuance, and
determined there are no material transactions to recognize or disclose.
F-15